Excerpts from analyst's report

UOB Kay Hian analyst: Brandon Ng, CFA

CSE GLOBAL (CSE SP): A Software Technology Company Rather Than O&G Play


BrandonNg12.14VALUATION 
"Maintain BUY and target price of S$0.71, based on 10.4x 2015F PE. Our target PE is at a 40% discount to sector mean of 17.2x to account for the challenging operating environment ahead. CSE is trading at 7.2x 2015F PE with a prospective dividend yield of 5.6%."  -- Brandon Ng, CFA (photo)

WHAT’S NEW
• Why the slide? CSE Global’s (CSE) share price has fallen 20.2% from its 2015 high despite reporting top- and bottom-line growth and securing more orders (+22.1% yoy) in 1H15.

The price underperformance is probably due to the misconception that CSE is mostly an oil and gas (O&G) company and its earnings are at risk following the oil price slump.


INVESTMENT HIGHLIGHTS
Mainly engaged in O&G production. CSE derives 82% of its revenue from the O&G industry but caters mainly to production platforms. Some of the system integration includes process control systems, safety shutdown systems, wellhead control systems and real-time information monitoring systems.

After the installation of these software systems, production platform owners would then require CSE to provide maintenance of these complicated networks, thus providing CSE a recurring income stream. Any relocation, de-commissioning and commissioning of the production platforms will also require CSE’s expertise.

Orderbook of S$237.8m provides earnings visibility for next 12 months. CSE secures S$80m-100m worth of orders every quarter (60% recurring), of which 75% are related to process control systems and 25% to communications and security. In addition, 70% of these orders are secured in US dollars, thus CSE could benefit from the appreciating US dollar. Management is confident that with the orders on hand, CSE can record sustainable earnings in 2015. The company generated respectable EBIT margins of 12.6% and 3.7% in process control systems and communications and security respectively in 1H15.

Clear growth strategy. Management recognises the challenges in the operating environment with the level of activities experiencing a decline and the deferments of large greenfield projects by their clients. Hence, CSE will be focusing on smaller brownfield projects, securing new customers and servicing existing customers across territories.

CSE has also recently set up office in the Permian Basin, West Texas, and expects to service companies in the shale industry. Although CSE has only secured three accounts, there are more than 120 companies in the region. Most of these drilling companies remain profitable even at current oil prices. CSE would also like to grow its infrastructure business, particularly in the railway and bus networks. Although orders from this industry are difficult to secure, they are recurring and resilient in nature.


Full report here.

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